Pre-World War I Evoked in Post-Crisis Markets: Cutting Research

Global capital markets are more integrated than at any time since the late 19th century, giving a reason to be upbeat about the world economic outlook.

Non-resident ownership of domestic bonds in emerging markets has increased since the financial crisis, Simon Quijano-Evans, head of emerging-markets research at Commerzbank AG, said in an Oct. 8 report. Almost half of Hungary’s debt is held by foreigners, doubling from 2010, while overseas ownership of Polish, Turkish, Mexican and Russian debt also has jumped.

“A tough task, but we should have plenty of room for optimism, given the ever-increasing global integration at both a human and economic level,” Quijano-Evans said.

To him, it recalls the period more than a century ago when people moved freely around Europe without the need of a passport. That age ended with World War I.

It’s not the only example of interdependence that has formed through the financial crisis. The share of developed market exports going to developing nations rose to 30 percent last year from 23 percent in 2007, while industrial countries became more dependent on foreign workers.

The number of migrants stood at 120 million in 2010, compared with fewer than 80 million in 1990. Remittances sent home by workers from emerging markets now account for as much as 20 percent of gross domestic product in some African countries and 10 percent for the Philippines. Even Germany receives $14 billion a year from its diaspora.

“Rather than cause divisions, the crisis years have highlighted how interdependent developed markets and emerging markets have become, substantially increasing the profile of emerging markets,” said Quijano-Evans, a former official in Thailand’s Ministry of Industry.

More worried is Joachim Fels, co-chief global economist at Morgan Stanley in London. He suggested in a Sept. 30 report to clients that the globalization push of recent decades is weakening as it did a century ago.

“I wonder whether just as 1913 marked the end of the first Golden Age of globalization that had begun in 1870, 2013 may mark the end of our age of globalization, which accelerated since the 1980s and 1990s after many emerging markets opened up to international trade and capital flows,” said Fels. “I’m not predicting the world wars, mass sufferings and economic depressions of the three dark decades following 1913, but I do worry about a creeping trend towards a de-globalization of economic activity and capital flows.”

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France would incur the biggest cost if a fresh financial crisis forced European governments to recapitalize their banks.

The government would have to provide 239.92 billion euros, or the equivalent of almost 12 percent of GDP, according to a study published this month by the IESEG School of Management in France.

Cyprus and Greece would have to find more than 8 percent of GDP in public funds to save their banks. Finland’s financial industry would be the least in need of state aid, the study found.

A crisis was defined as a 40 percent slump in the stock market over six months. Author Eric Dor, director of economic studies at IESEG, also assumed European banks would be expected to maintain equity equivalent to 5.5 percent of their assets.

Given their already high level of indebtedness, increasing the public debt ratio by 5 percent to 10 percent of GDP (FRGEGDPQ) would “certainly trigger a sharp increase of interest rates on government bonds,” Dor said.

“An extremely severe fiscal austerity should be implemented, leading to a new recession,” he wrote.

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Monetary policy is more potent in expansions than in recessions.

So say economists Silvana Tenreyro and Gregory Thwaites, who examined the effects of Federal Reserve decision-making from 1969 to 2008.

Their analysis found almost all the effect that the Fed’s benchmark rate had on economic activity was attributable to shifts made during upswings. The impact was particularly driven by the reaction to rate changes of business investment and consumer spending on durable goods.

One explanation is that during recessions people hold back from buying expensive goods, so rate changes don’t affect their spending on those as much as during stronger growth, said Tenreyro and Thwaites, in a study published Oct. 10 by the Centre for Macroeconomics at the London School of Economics.

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Countries that attract trade and finance should also lure investors, according to Societe Generale SA.

Since the end of 2007, the developed nations in the top five for so-called international investment positions, including Singapore, saw stocks fall 11 percent, their exchange rates gain 9 percent versus the dollar and bond yields drop 154 basis points. An international investment position measures the difference between a country’s external financial assets and its liabilities.

By contrast, those in the bottom five, including Greece, experienced a decline in benchmark equity indexes of 40 percent on average and in currencies of 1 percent, while 10-year bond yields rose 82 basis points.

A similar relationship exists in emerging markets, Societe Generale said in its Sept. 26 study of 48 countries.

Those with poor positions, such as Croatia, lost 28 percent in equity valuation and their currencies dropped 24 percent. Those that attracted investors, such as China, suffered only a 5 percent decline in stocks and an 8 percent fall in currency.

“External accounts have huge market implications,” said Paris-based strategist Philippe Ferreira.

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Trade related to infrastructure will provide a force for good in the world economy in coming years, with HSBC Holdings Plc predicting it will triple by 2030.

The pace of such goods, such as those used to construct buildings and transportation networks, will grow at an average of 9 percent a year by then and rise as a share of total trade to 54 percent of global exports from 45 percent, HSBC said in an Oct. 8 study.

The report differentiated between goods for infrastructure projects on the one hand and investment equipment, which is machinery required by businesses to boost production, on the other.

It predicted by 2020 the U.S. will have been passed by India as the biggest importer of infrastructure goods as it rebuilds its domestic transportation networks. China will become the largest importer of investment equipment as it boosts manufacturing capacity.

To contact the reporter on this story: Simon Kennedy in Washington at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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